The LBMA, the world’s largest association of bullion dealers, has seen the number of contracts taking delivery increase significantly in the last year. Between 2011 and 2012, US exports of silver to the UK increased from 19 metric tonnes to 291.
As Laurence Williams points out, this increased demand for physical is taking up an available supply, meaning those banks holding short-positions are ‘playing a very dangerous game indeed’.
The supply position is one which is currently being tested by the Sprott Physical Silver Trust. We are all going to be interested to see how long it takes for the 7.127 million troy ounces of silver bullion to be delivered which was ordered by the Trust in mid-November 2011.
One of the best indicators of increased silver investment demand is silver coin sales. Between 2002 and 2011 official government coins and medals total supply increased by 274%, to 118.2 million ounces. Whilst demand for official silver coins declined in the first half of 2012, they have not suffered nearly as much as gold coins have. In the last year, for example sales of Gold Eagles were down by 36% compared to 2011, whereas Silver Eagles were only down by around 18%.
According to data from the US Mint, the purchase of silver ounces exceeds gold ounces by 45:1. Just three years ago it was less than half that amount.
Speaking of silver coins, as of 2011 it became legal for Chinese citizens to own silver coins. This has seen the minting of Silver Pandas increase from 6,000 a year between 2001 and 2011, to 6 million in 2011 and approximately 8 million in 2012. As the Chinese government work hard to redirect savings into precious metals we may see them work to build the Chinese Panda into a worthy rival to the American Silver Eagle, which may see supply increase to over 40 million per annum.
The continuing investment in silver, and gold, coins suggests we are seeing smaller investors coming to the market who plan to hold onto their investments as a form of wealth protection.
China Leading the Way Once Again
China is officially the shining light of the silver investment market. It is now, according to a Silver Institute report, the world’s largest market for physical investment and paper trading of silver futures. Not only are they big on investment, their supply of silver is also growing rapidly, increasing by 281.5 million ounces between 2002 and 2011. Also, by 2011 demand for silver bars and coins in China accounted for 8% of worldwide net purchases of silver, soaring to 17 million ounces.
The report, entitled The Chinese Silver Market, foresees further growth in both supply and demand thanks mainly to state-owned Chinese mining companies’ investment in expansion, and the increase in silver fabrication demand which has grown by 137% in the last 4 years.
As we head into 2013, silver’s move towards (and beyond) $40 seems perfectly feasible. Considering its performance in early 2011 when it appeared as though the world economy was on the rebound, we seem set for a repeat of this as we see the fiscal cliff resolution and China’s positive data put some concerns to one side.
Investment demand appears to be the element which will be the driving force behind the silver price in the next year; we can see this is silver coin sales and the amount of silver being exported to the UK. As the global economy continues to deteriorate we see increasing numbers of investors taking delivery on the back of paper contracts.
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